Saturday, January 24, 2015

More on Economic Modeling

I'll take a vacation from my vacation to comment on this NeoGAF thread that I've been seeing today.  And I actually want to start by thanking the people who have linked here.  Now having said that, I saw the thread yesterday or the day before and I was amazed by the number of people who have probably never studied economics who claim to know more than everyone else. 

One poster claims that I'm treating aggregate supply and GDP like they're the same thing.  They're not.  The long-term aggregate supply curve (RE-AS) is vertical and it's not just the supply-siders who have been saying this.

I'll quote a prominent economist, Professor Farrokh Langdana at Rutgers.  When he says Y0, he's referring to the starting rate of GDP growth:

"Remember that Keyenesian discretionary fiscal and monetary policies have no effect on real GDP growth or employment in a classical-type model.  In fact, demand-side stabilization, the mainstay of Keynesian policy, is neutral to real variables and affects only nominal variables such as inflation and nominal wages....  Against this new backdrop, if Y0 is indeed some recessionary low rate of growth, how can GDP and employment be stimulated if expansionary fiscal and monetary policies have no effect?  Since shifting the aggregate demand affects only inflation, leaving Y0 unchanged, clearly the only viable policy option would be to shift the aggregate supply to the right to increase GDP growth."

The fact of a vertical long-term aggregate supply curve is the reason why the supply-siders have the right interpretation of policy.

On a different topic, a NeoGAF poster asked if the population model took into effect "the fact that people die."  At 0.6% growth per year for 6,000 years, the human race would have a population in the quadrillions (see Preamble post).  Yes, this model takes into account the fact that people die.